Some interesting stuff to watch.
Over the last few days there's been a lot of underreported developments in the Middle East.
Let's talk about diesel. Diesel is one of the products we get from refining crude oil.
This conversation is interesting in the context of Burnham going on about national security and social security at the end of last week. It was so badly timed and ill conceived in my honest opinion.
Let me expand why:
A few years back the UK had a total of 18 diesel refineries. This has now reduced to just four.
https://commonslibrary.parliament.uk/research-briefings/cdp-2025-0235/
This puts us in a position where we only produce 50% of the total amount of diesel we consume. The rest we mainly import from the Netherlands, with the rest coming from the US and directly from the Middle East.
The EU produces about 80% of the amount it consumed. The US is largely self sufficient atm but is currently operating at a 95% capacity to make up for short falls elsewhere.
The war in Iran has caused significant disruption to crude oil production and to diesel refining. Concerns are greatest around (but not confined to) diesel. The blockade of the Strait of Hormez has been affecting how much availability there is. As has the targeting of plants in the middle east by Iran which have not been reported by the media much. In order to mitigate this, national reserves have been used to cover short falls whilst production is increased elsewhere. Saudi Arabia has been particularly badly hit with the latest figures for August showing production was down 50%. Iraq has largely covered the short fall. And that's been finding whilst everyone thought the conflict wouldn't be prolonged.
That calculation is changing. The sentiment on this is now changing.
Over the last few days Iran and the US have escalated and started targeting oil tankers. Then the Iranian aligned Yemenis took land close to the Red Sea entrance. They now effectively control the strait which provides access to the Suez Canal. And they took out several large Saudi oil storage containers. Finally the east west Saudi pipeline which was basically propping up the Saudi exports got hit and will be closed for a couple of weeks. (Something that was officially confirmed AFTER the US markets closed on Friday).
The Saudis were one of the biggest exporters of oil products. The problem here is that with the Yemenis controlling the Red Sea Strait even if other countries in the middle east put up production we have a problem. They either have to go around Africa (more time and money) or a deal has to be reached with the Yemenis (and this is going to increase insurance costs anyway). This means at best, a time lag problem, so what we have in reserves matters for diesel.
But.
The US usually puts some of its refineries offline for maintenance over winter - just as demand tends to go up. Prices for diesel have already hit highs. With it being at capacity already and having low reserves there's an issue. And there is likely to be delays to crude oil deliveries compared to usual delivery times. And it's hurricane season and guess where a lot of US refineries are located? Paradoxically El Nino years tend to reduce the number of hurricanes in this area, so that may be something to be grateful for yet. So we are about to potentially have bigger issues.
Now consider what do we use diesel for?
Freight and Agriculture and Trains.
However you cut it, it's hard to see a scenario where diesel costs aren't going to skyrocket. Oh yes that's great for inflation over that...
It is not in Iranian interests to resolve matters until after the US midterms - they see Trump as the problem. If they can hold out they will. Even if China does step in to try and resolve matters immediately, there's still the small matter of Saudi infrastructure being screwed and that it will take time for someone else to fulfill the shortfall. That's China that's currently buying up oil at inflated
If this carries on for longer, and right now there's nothing to suggest this will be resolved immediately, there's going to be issues with demand exceeding supply. Aka shortages.
It depends on how much diesel the UK has in reserves. And how much the EU has in reserves. This is where national security issues start to kick in - if there are shortages in the EU will they prevent the export of diesel? Who is particularly exposed in that event?
Oh yes, that's us, the UK.
Now I sincerely hope, that Burnham is watching these developments very closely. Because it doesn't bloody matter what he wants to put in the budget, if these forces beyond his control start to escalate much further. THIS and THIS only could dominate calculations over the coming weeks and months.
Add to this. Martin Lewis was warning last week that gas prices are already headed above the energy price cap and there being a problem.
Oh and Russia's latest tactic seems to be targeting Ukrainian petrol stations. I can't think why...
So do we want a cold or a warm winter?
A warm winter = more storms and flooding.
A cold winter = greater pressure on energy when we are looking at a squeeze on fuel.
Rock meet Hardplace.
The next few months could be TOUGH. For everyone.
There are reasons here in the above, to really start considering your actions - not panicking - but planning effectively and efficiently. For example walking a bit more than you usually do if you can, isn't going to be the worse decision you can make that's for sure. Save fuel, get fit, save money without damaging the economy too much elsewhere, get used to walking...
Looking at all this, it is interesting timing for the government to have been gently nudging the public towards having extra supplies i, isn't it?
I think Burnham has jumped the gun somewhat on making public his spending intentions and will instead be left with even worse firefighting options (aka a choice between shit decisions no one wants to make).
The possibility of a genuine crisis and economic shock arising out of this - which could tip us into recession - are fairly high at this point. It's not definite, but there's some key warning signs here and the UK certainly has more exposure here than makes me comfortable, compared to other western countries - as well as less capacity to absorb yet another shock.
This isn't some fantasy. This isn't zombie apocalypse. This isn't over reacting. This is looking at the situation and going "hmm where is this going and how is it going to effect me" cos I don't think this events far away at all.
This is one of those pay close attention things like just before COVID. And hope to god that this unravels better than it currently seems to be shaping up in terms of possible outcomes.